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Is the Fiscally Focused GC About to Change How Legal Services are Delivered and Priced?
The relationship between law firms and in-house counsel, and the relationship between in-house counsel and their colleagues in the finance department, have seen significant change during the past two decades. Those changes have brought us to a juncture where fiscally savvy GCs have more authority over legal spend, and soon will wield that authority to change the face of how law firms deliver legal services and how much companies pay for them.
That is the prediction of Anastasia Kelly, who has held leadership positions in the legal departments at AIG, MCI/WorldCom, Sears, Roebuck & Co., and Fannie Mae, and continues to serve as director of O-I, the world’s largest maker of glass packaging. Kelly also serves on the Board of Huntington Ingalls Industries, a year-old public company spun off from Northrop Grumman.
Now a partner at DLA Piper, Kelly says we have moved from a time—when law firms unilaterally crafted engagement letters that GCs simply signed, and when the GC’s legal spend was sacrosanct and not open to question from CFOs—to a time when GCs have embraced the discipline of corporate finance and are directing law firms to function just as well as ever, but with more creative ways to control costs.
Kelly predicts that all of this has brought the legal industry to a “moment in time” when a huge workforce of good attorneys—displaced during the recession or other life circumstances, or are unable to find work after law school—will be leveraged in a way that the price of performing legal work is reduced and the work-life needs of the individuals are met.
The driving force behind this shift will have to be, Kelly says, GCs who are guarding companies from legal risks and unnecessary spending.
The Way We Were
In the 1980s companies were still signing law firm—drafted engagement letters with no clear understanding of rates and charges for law firm overhead items, Kelly says. Attorney letters even required payment within 30 days or the client would have to pay a 1.5 percent interest charge. “The world has changed hugely since then,” Kelly observes. “Today in-house counsel can take practical steps to get their house in order for the sake of efficiency, productivity and budgeting. There must be a win-win relationship between in-house counsel and outside lawyers for this to work.”
“Get an engagement letter that in-house counsel are comfortable with and every law firm will sign it, I promise you,” Kelly says. “No law firm is going to say, ‘you are going to use my letter, not yours.’” She tells in-house counsel to “define the things you are going to pay for” and deploy a matter-management or e-billing system. With advancements in technology, electronic invoicing is efficient even for small law departments. “You get that low hanging fruit. Then establish a good solid foundation in cost savings.”
Here’s the Carrot, Here’s the Stick
How do you cut your legal spend? “That’s what this is really all about,” Kelly says. GCs should feel comfortable shifting much of the cost-saving responsibility to the law firms, and giving them the impetus to take it on. “Unless there is an incentive on the law firm side and the in-house counsel side, all of these ideas are just that, ideas.”
“Law firms are the ones who understand how their businesses are run, what their overhead is, how much business they need to keep everybody paid and in their seats. That’s where the creativity needs to come from.”
“And right now,” Kelly says, “We are at a tipping point in the provision of legal services, how we do it and the billable hour. This is a moment in time when we have a huge number of really good lawyers out there because of the recession, or who are coming out of law school who will make good, competent lawyers, but they do not have jobs. So we have an over supply.”
She’s right. According to Economic Modeling Specialists Inc., based on information from the Bureau of Labor Statistics and the Census Bureau, except for Wisconsin, Nebraska and Washington, D.C., all states are producing more lawyers than they need. Across the country there were twice as many people who passed the bar in 2009 (53,508) as there were openings (26,239). The state with the greatest lawyer surplus? New York, followed by California and New Jersey.
The Hourly Rate
“We have an over supply of attorneys and in-house counsel looking at their budgets. They have taken all the low-hanging fruit, and now are in a position to really understand why their spend is what it is and how they can do this in a more revolutionary way,” Kelly says. “As an in-house attorney I may not just say I am not going to pay for first-year associates. Maybe I say I am not going to pay $400 for any associate. I am talking about having real revolutionary kinds of conversations that might lead to a change in a way that legal services are provided by outside counsel to in-house counsel.”
“[As in-housel counsel] I don’t mind spending $800 an hour for that portion of the engagement where I need the best, the brightest and most experienced person,” Kelly says. “But most of the law firm work is not that stuff. So how do we take that 80 percent of the work and bring it down to a universe of lawyers who do this work for $200 an hour? That’s exactly where these conversations should be heading. As long as we have the billable hour, and as long the law firms themselves don’t have any reason to change the way they work, they won’t. It has to be driven by in-house lawyers. You have to demand what you want and what you are willing to pay for, and I promise you the law firms will do it.”
Free-Agent Lawyer Nation
“What you are seeing today, which could revolutionize how legal services are provided, are companies setting up exchanges, where because of technology you can tap into ‘single shingles’ or the ‘free agent nation’—lawyers who do not want to be or can’t be part a law firm, and take work they can do from anywhere. Technology makes this possible in the U.S. domestically, with lawyers who are licensed here who can form virtual teams for different projects or companies, and are managed by somebody who knows how to do this, and that person is the interface with the law firm, who is going to outsource this at the direction of the general counsel. That’s the new big idea.”
“It’s the GC who will say, this is the way I want you to do this engagement. I want you to do this much of it, and I want to figure out which tasks go to the exchange… and by the way, we’ve used this exchange before, it has lawyers we have worked with before, and these are the lawyers we want more of. If the GC asks for this, the law firm will do it. They will hate it, but they will do it. Then it’s going to be successful and the law firms who embrace it early are the ones that are going to be successful,” Kelly predicts.
Anastasia Kelly is a partner in DLA Piper’s White Collar, Corporate Crime and Investigations practice. She’s also a member of the firm’s corporate and finance and public company and corporate governance practices.
Disclaimer: The views and opinions expressed in this article are those of the individual sources referenced and do not reflect the views, opinions or policies of the organizations the sources represent.